fiduciary duty issues in m&a transactions - Jackson Walker LLP

and reporting system existed.” KPMG’s findings reflect that the Board receivedand approved relevant policies and procedures, delegated to certain employeesand departments the responsibility for filing SARs and monitoring compliance,and exercised oversight by relying on periodic reports from them. Although thereultimately may have been failures by employees to report deficiencies to theBoard, there is no basis for an oversight claim seeking to hold the directorspersonally liable for such failures by the employees.With the benefit of hindsight, the plaintiffs’ complaint seeks to equate abad outcome with bad faith. The lacuna in the plaintiffs’ argument is a failure torecognize that the directors’ good faith exercise of oversight responsibility maynot invariably prevent employees from violating criminal laws, or from causingthe corporation to incur significant financial liability, or both, as occurred inGraham, Caremark and this very case. In the absence of red flags, good faith inthe context of oversight must be measured by the directors’ actions “to assure areasonable information and reporting system exists” and not by second-guessingafter the occurrence of employee conduct that results in an unintended adverseoutcome. Accordingly, we hold that the Court of Chancery properly appliedCaremark and dismissed the plaintiffs’ derivative complaint for failure to excusedemand by alleging particularized facts that created reason to doubt whether thedirectors had acted in good faith in exercising their oversight responsibilities.In American International Group, Inc. Consolidated Derivative Litigation; AIG, Inc. v.Greenberg, et al, 87 Vice Chancellor Strine denied a motion to dismiss Caremark claims againstformer Chairman of American International Group, Inc. (“AIG”) Maurice “Hank” Greenberg,three other directors (who were also executive officers part of Greenberg’s “Inner Circle”) andother AIG directors for harm AIG suffered when it was revealed that AIG’s financial statementsoverstated the value of AIG by billions of dollars and that AIG had engaged in schemes to evadetaxes and rig insurance markets. The Court emphasized that the claims were not based on oneinstance of fraud, but rather a pervasive scheme of extraordinary illegal misconduct at thedirection and under the control of defendant Greenberg and his Inner Circle, and wrote: “OurSupreme Court has recognized that directors can be liable where they ‘consciously failed tomonitor or oversee [the company’s internal controls] thus disabling themselves from beinginformed of risks or problems requiring their attention.’” Recognizing that this standard requiresscienter, the Court found pled facts that supported an inference that two of the defendantdirectors were conscious of the fact that they were not doing their jobs.Breach of fiduciary duty claims were also not dismissed against directors alleged to haveused insider information to profit at the expense of innocent buyers of stock, with the Courtwriting: “Many of the worst acts of fiduciary misconduct have involved frauds that personallybenefited insiders as an indirect effect of directly inflating the corporation’s stock price by theartificial means of cooking the books.”87C.A. No. 769-VCS, 2009 Del. Ch. LEXIS 15 (Feb. 10, 2009).5446095v.122